Sitting pretty

McDonald's overseas sales are surging as it adapts successful U.S. operations to local tastes, styles of its international restaurants

September 14, 2008|By Mike Hughlett, TRIBUNE REPORTER

Whether it's the Maharaja Mac in India, the Croque McDo in France or the Tamago Double Mac in Japan, they're all part of the same recipe: an overseas golden age for U.S. fast-food giant McDonald's Corp.

Oak Brook-based McDonald's in recent years has taken the same winning template devised in the United States -- longer hours, quicker service, a healthier menu, etc. -- and applied it across the globe. Plus, analysts say it's benefited from a decentralized approach, with more menu choices culled from local tastes and managers hired from local ranks.

And this year, with McDonald's U.S. sales slowing because of a weak economy, international has particularly been a star.

But European economies are expected to slow considerably in the coming months, while the Japanese economy looks vulnerable too. Plus, currency translation benefits enjoyed by McDonald's and scores of other U.S. multinational companies may go out the window as the U.S. dollar strengthens.

Still, Jim Skinner, McDonald's chief executive, doesn't seem worried. "We operate better in a robust economy, but in some ways we are recession resistant," he said in an interview with the Tribune last week. "We are capable of operating in any [economic] environment and we have proved that for 52 years."

As the U.S. economy weakened this year, McDonald's U.S. same-store sales fell in March, the first decline in that key year-over-year gauge since 2003. Since then, sales have bounced back, and overall U.S. revenues through June were up 3 percent over the same six months in 2007, while operating income had risen 5 percent.

But McDonald's overseas performance has been more impressive this year, analysts say. Sales in Europe alone, which is McDonald's biggest market by revenue since 2004, climbed 9 percent for the six months of 2008, while operating profits jumped 21 percent even after adjusting for currency benefits.

And while the U.S. remains McDonald's most lucrative market, the combined operating profits of its European and Asian segments seem likely to surpass those of the U.S. this year.

"It's just really good execution across the brand and across the globe," said John Owens, a stock analyst at Morningstar Inc. "They took a lot of pages from their playbook here and implemented them overseas."

That playbook, dubbed "Plan to Win," was forged in 2003 when McDonald's was floundering. Instead of focusing on constantly opening new stores, McDonald's opted to concentrate on the basics: better customer service, tastier food, better-looking restaurants and so on.

The company has "re-imaged" thousands of its existing stores here and abroad, dumping the orange-red fiberglass motif. And that new upscale look -- think earth tones and coffeehouse -- seems particularly pronounced in Europe, said David Palmer, a stock analyst UBS Securities.

"Their assets are spectacular in Europe versus other markets," he said. "I'm talking about the restaurant buildings. They're often newer and better than what we see in the U.S."

Food in those restaurants isn't radically different from those here, but part of McDonald's overseas success comes from its "locally relevant menu choices," said Morningstar's Owens.

So, for the French, there is the Croque McDo, which is ham and melted Swiss cheese on round toast; the Japanese get two beef patties and a fried egg between two buns in the Tamago burger; and Indians can avoid beef with the double chicken patties of the Maharaja Mac.

It's not just the food that's gotten more regional over the years, it's McDonald's management. Back in 2001, when Skinner ran McDonald's European operations, he did so from Oak Brook. Since 2005, they've been run from London by Denis Hennequin, a French native often praised for McDonald's European turnaround.

Locally-based leadership goes down to a countrywide level, and "it is very important," said Palmer, the UBS analyst. "They have established accountability and very effective local leadership."

And if an innovative idea works in one country, it often makes its way to another, Palmer said. For instance, specialty coffee -- the caramel cappuccinos and such that McDonald's is rolling out in the U.S. -- originated from a successful initiative in Australia.

While McDonald's operates in 118 countries, its most promising growth opportunity seems to be China. It's one of the few markets where it's not ranked No. 1; that title goes to KFC. But it will have 1,000 stores in China by the end of the year and plans to add several hundred more in the years to follow. "China is coming on strong, and we have a huge opportunity there," Skinner said.

Today, Asia represents 12 percent to 13 percent of McDonald's profits. Within 10 years, Skinner estimated the region would comprise 30 percent to 35 percent of profits, with China accounting for a big chunk of that growth.